‘Current situation similar to one the Soviet Union experienced in 1986’

Vladimir Mau, one of the authors of the Russian economic reforms of the 1990s, spoke with RBTH about the challenges facing the country's economy.

After oil
prices started their now-infamous downslide in September 2014, the Russian
ruble suffered a dramatic collapse. In an interview with RBTH at the Gaidar
Economic Forum in Moscow, Rector of the Russian Presidential Academy of the
National Economy and Public Administration, Vladimir Mau, who was one of the
brains behind Russia’s economic reforms of the early 1990s, said that the
current situation is similar to what the USSR experienced in its later years.

RBTH: Due to falling oil prices and the sharp decline of the
ruble, the Russian economy now finds itself in fundamentally new territory. How
would you characterize this new reality?

Vladimir Mau: As the
director of a budgetary institution – the largest university in the country – I
love high oil prices. But as an economic historian, I prefer moderately low
prices for natural resources, because excess rent income always spoils
institutional quality. In the 16th century, the rent incomes in the
form of silver and gold that flowed to Spain for 50 years led to the collapse
of the most powerful state in Europe at that time. We need to understand that
the modern crisis in Russia is above all a serious reason to reflect on our
macroeconomic policy.

V.M.: If oil prices
remain low, we can assume that we have done away with the “Dutch disease,”
which is when it becomes unprofitable to produce any goods besides raw
commodities. That gives us the opportunity to decisively suppress inflation
without fearing that companies will lose their competitiveness as the result of
an appreciated ruble. Russia can also simplify migration law, because the
country has become less attractive for immigrants.

RBTH: In your opinion, what is the main reason behind the modern
economic crisis in Russia?

V.M.: Today we are
seeing an overlap of several crises. First of all, there is the ongoing global
structural crisis, which is leading to profound changes in the economies and
policies of the world’s leading countries. Secondly, we are observing a crisis
in Russia’s economic growth model of the 2000s, the cornerstone of which was
increasing demand – consumption in particular. Thirdly, the geopolitical
situation has deteriorated, in connection with which the Russian economy is
experiencing a shock from the sectoral sanctions imposed against the country
primarily in the financial sphere. This is compounded by the foreign economic
shock resulting from falling oil prices – a crucial source of income for the
Russian budget.

RBTH: How does the modern economic crisis in Russia differ from
the 2008-2009 crisis?

V.M.: The key
difference is that at that time we worked with the whole world to find a way
out of the crisis, but now we are searching by ourselves and no one is helping
us. In general, the situation is very similar to the crisis that the Soviet
Union experienced in 1986. At the present moment, the external shocks for the
Russian economy are the falling oil prices and the effect of the sanctions. In
1986 we had roughly the same situation with falling oil prices, superimposed on
the anti-alcohol campaign, which deprived the budget of its second most crucial
source of income. In 1986, the Soviet government subdued the crisis by
borrowing from foreign sources. The USSR entered the crisis with a balanced
economy, but it only took four years for the government to collapse, even
though within two years the country started experiencing economic growth. The
USSR had virtually no reserves and it was a much more rigid economic system.

RBTH: Economists have been saying that Russia could respond to the
crisis with a mobilization or liberal economic development scenario. Which of
these scenarios do you think would be best for Russia?

V.M.: The
liberalization option has spread throughout the world in the past few decades.
China gave us the largest-scale example of that sort of development after 1978,
and especially after the student demonstrations in 1989, when economic
sanctions were imposed against the country. It was precisely as a result of
that liberalization in China that we saw rapid growth in investment and GDP in
1992. There are other examples of accelerated growth based on liberalization,
as well – Chile, Finland, Ireland, South Africa, Poland. But I can’t give you
any examples of rapid growth in the framework of the mobilization model in the
past half century.